TAX RATES ON INCOME

(a) Taxable income

In general, the calculation for determining taxable income is as follows:

If taxable income (excluding taxable capital gains) is a negative amount, it is referred to as a computed loss and, after assessment, as an assessed loss.

(b) Tax on companies

Resident companies

A South African resident company (or close corporation) is generally subject to income tax on its taxable income at the flat rate of 28% for the tax year ending on any date between 1 April 2009 and 31 March 2010 (2009/10 tax year).

For the previous three years, the rates of tax applicable to resident companies were:

2008/09 year — 28%

2007/08 year — 29%

2006/07 year — 29%.

Natural persons are not prohibited from using the corporate form (via a personal service provider company) to convert personal employment income into corporate income (eg a professional athlete who forms a company and provides personal services to his or her team through the company).

A personal service provider company is a company that has been penalised to prevent the use of corporate entities to provide services to clients by converting personal employment income into the lower tax rate corporate income. No person or company should ever seek to be classified as a personal service provider company because such a company is subject to deduction limitations (making its taxable income higher than necessary) and is also subject to income tax at 33% instead of the normal 28%.

Rates of tax for personal service provider companies for the previous three years were:

2008/09 year — 33%

2007/08 year — 34%

2006/07 year — 34%.

Ref: ITA s 12E(4)(b)

A small business corporation is subject to a 0% rate of tax on the first R54,200 of income, 10% on the next R245,800 of income and 28% on income in excess of R300,000 for the tax year ending 28 February 2010. A small business corporation is a company, other than an employment company as described above, with income that does not exceed R14 million and earns no more than 20% of its gross income (other than capital gains) from investments or the rendering of personal services. At least three independent employees must be employed in the core operations of the business, and the shareholders/members may not hold shares in any other company or close corporation (excluding stock exchange listed companies).

For the previous three taxable years the rates of tax on small business corporations were as follows:

Ref: ITA s 12E(4)(a)

Special rates and provisions apply to taxable income derived from certain specialised industries (eg gold mining, farming, mining in general, oil and gas operations, long-term insurance and retirement funds).

In addition to income tax, if a resident company declares a dividend out of capital or revenue profits other than local dividends received, the company is subject to a secondary tax on companies (STC) at the rate of 10% of the dividend declared. A foreign registered company that is resident in South Africa because it is effectively managed in South Africa is subject to STC in the same manner as any other South African resident company and, if it ceases to be a South African resident, is subject to STC on all accumulated profits available for distribution as a dividend.

Ref: ITA s 64B and 64C

For the previous three years, STC rates were:

2008/09 year — 10%

2007/08 year — 10%

2006/07 year — 12.5% (10% on or after 1 October 2007).

Comprehensive and wide ranging anti-avoidance provisions prevent a company from avoiding STC by distributing assets or income to shareholders other than through a dividend. For example, an interest-free loan to a shareholder may be deemed to be a dividend for STC purposes. A reduction of reserves on buyback of shares is also subject to STC.

Ref: ITA s 64C

As a special concession, a resident company is not required to pay STC if it declares a dividend in anticipation of liquidation or deregistration (or during such process), if such dividend is declared out of profits of a capital nature in respect of the period prior to 1 October 2001 or out of all profits or reserves earned before 1993. The government has announced that this concession will end on the same date the new dividends tax comes into force.

Ref: ITA s 64B(5)

Pending changes

The government has announced that it intends to replace STC in late 2010 with a dividends tax at the rate of 10%. The dividends tax (which will be a final tax) will be payable by the shareholder although collected through a withholding tax deducted by the company and paid over to SARS. The tax will not be payable on dividends declared to another company resident in South Africa and certain other entities.

Ref: ITA s 64D to 64L

The dividends tax will likely be more readily acceptable to foreign investors as it is expected that the withholding tax will be subject to reduction through tax treaties or at least available for credit against home country tax.

Non-resident companies

A company which has its place of effective management outside South Africa and which has not been incorporated, established or formed in South Africa is not a resident of South Africa for tax purposes. A non-resident company must register in South Africa as an external company to establish a place of business in South Africa or to acquire immovable property or real estate in South Africa.

Ref: CA s 324

A non-resident company is subject to tax on South African source income at a rate of 33% for the tax year ending on any date between 1 April 2009 and 31 March 2010. A non-resident company is not subject to STC on the dividends it declares. A non-resident company’s royalty income from a South African source is subject to tax at the flat rate of 12% of the gross amount (subject to an applicable tax treaty).

For the previous three years, the rates of tax on non-resident companies were:

2008/09 year — 33%

2007/08 year — 34%

2006/07 year — 34%.

If a non-resident company that does not carry on business in South Africa has interest income from a South African source, it is exempt from tax on this income. This exemption does not apply if the interest income is effectively connected with the business carried on by that company in South Africa.

Pending changes

Passive holding companies

Simultaneous with the introduction of the new dividends tax, a passive holding company regime is to be introduced to counter the trapping of dividends and passive ordinary income in a company. Active income is not a concern because strong non-tax business reasons exist for keeping businesses in limited liability form. Real estate is also not of concern for the same reasons (even though potentially passive).

The rules will apply to companies which meet any one of the following conditions:

• the company is not specifically excluded from the regime. Excluded companies include banks, listed companies and their subsidiaries, foreign companies and PBOs

• more than 50% of the company’s participation rights (generally its ordinary equity share capital) are held (directly or indirectly) by five or less natural persons resident in South Africa

• more than 80% of the gross income of the company for the year in question constitutes passive income. Passive income is income derived from financial instruments, ie interest and dividends. Certain dividends are excluded from the 80% calculation (both as numerator and denominator). These dividends are those derived from subsidiaries where the holding is 20% or greater. The definition of gross income for this purpose also excludes royalties and capital gains.

It is proposed that the tax rate applicable to the dividend income of passive holding companies will be 10%. The tax rate applicable for all the taxable income of such companies (i.e. excluding dividends) will be 40%. Capital gains are not subject to this special regime and will be subject to the normal rates of tax.

Ref: TA s 9D and 9E

(c) Tax on trusts

The taxable income of a trust that is not deemed the taxable income of others, is subject to tax at a flat rate of 40% whether or not the trust is tax resident in South Africa.

Ref: ITA s 25B

Unit trusts, mutual funds and collective investment schemes generally act as conduits to the unit holders. Income generally is not taxable in the hands of the trust but is instead taxable in the hands of the unit holders. The nature of the income of such trusts retains its character when distributed to the unit holders (e.g. local dividends received remain local dividends when distributed).

Capital gains of unit trusts are ignored and not taxed in the hands of the unit trusts or the unit holders. Instead, unit holders face tax on any capital gain realised upon disposal of their units.

Ref: ITA Sch 8 para 80

The tax rates applicable to a special trust created solely for the benefit of a handicapped person, or a testamentary trust formed for the benefit of minor beneficiaries, are the same as the rates for natural persons (see (e) below). Rebates for natural persons do not apply to special trusts.

Ref: ITA s 6

(d) Tax on partnerships and joint ventures

Partnerships and joint ventures are not taxable entities. The partners or joint venturers individually are responsible for the tax owed on their proportionate share of the taxable income or loss. The partnership or joint venture need not file a separate tax return. In practice, the taxable income of the partnership is determined in the usual way and allocated amongst the partners who then declare such net amounts in their tax returns.

Where a partnership carries on any trade or business, each member of the partnership is deemed to carry on that trade or business.

Ref: ITA s 24H

A limited partner is a member of a partnership en commandite or similar partnership. A limited partner is a partner whose liability towards the partnership’s creditors is limited to the partner’s contribution or agreed contribution to the partnership or is limited in any other way.

A taxpayer who is a limited partner may not take allowances and deductions under the ITA exceeding:

• the aggregate amount for which the taxpayer is or may be held liable to any creditor of the partnership, and

• the amount of any income received by or accrued to the taxpayer from such trade or business.

A taxpayer may carry forward and deduct in the following year any amount not so allowed as a deduction.

Ref: ITA s 24H

(e) Tax on natural persons

Tax residents of South Africa face tax on their worldwide income. A non-resident is subject to tax in South Africa only on income from or deemed to be from a South African source. The normal rate of tax for individuals applies to such income. The same tax rates apply to all individuals regardless of their residency status, except as follows:

• Interest income from a South African source accruing to a non-resident is exempt from income tax if the non-resident has not spent more than 183 days in South Africa during that tax year and does not carry on business through a permanent establishment in South Africa during the tax year in question.

• Interest income accruing to South African residents is exempt from tax up to R21,000 per annum or, for those aged 65 years or older, up to R30,000 per annum. Foreign interest and foreign dividends are only exempt up to R3,500 out of this total exemption.

• Royalty income from a South African source accruing to a non-resident is subject to a final withholding tax at the rate of 12% of gross amount (subject to an applicable tax treaty).

The following tax rates apply to natural persons for the tax year ending 28 February 2010:

From the tax so computed, the following rebates must be deducted:

• primary rebate for all natural persons — R9,756

• additional rebate for persons aged 65 years or older on the last day of the tax year — R5,400.

The rates of tax on individuals for the previous three years were:

(f) Tax on very small business corporations (micro businesses)

With effect from 1 March 2009, South Africa introduced the following presumptive tax scheme to replace VAT and income tax for companies which qualify as micro businesses (i.e. companies with annual turnover equal to or less than R1m):

Ref: ITA s 48, 48A, 48B and 48C

With permission from the Worldwide Business Tax Guide published by CCH Australia Limited.